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Trex and Lumber Liquidators Go Separate Ways

By Rick Munarriz – Mar 1, 2016 at 9:17AM

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The leading maker of weather-resistant alternative decking moves higher after posting blowout quarterly results, but the same can't be said about the struggling top dog in discounted hardwood flooring.

Image source: Trex.   

One of last week's biggest winners was Trex (TREX 2.50%), moving higher after posting encouraging quarterly results. The leading maker of wood-alternative decking materials saw its net sales soar 20% to $89 million since the prior year's holiday quarter. Back in late October it was only targeting a 15% top-line spurt. 

Net income climbed 57% to $8.1 million, or $0.26 a share. Gross margins were unchanged, but cost controls keeping SG&A expenses in check provided a dramatic boost to Trex's operating profit margin. This is the first time in the past three quarters that Trex has surpassed Wall Street's profit estimates.

It's important not to get too carried away by this seemingly solid performance. Trex runs a seasonal business, and naturally a lot of people aren't working on outdoor deck projects as winter creeps in during the final three months of the calendar year. The quarter accounted for just 20% of Trex's net sales last year. This has historically been Trex's sleepiest quarter. It generated 58% of its business during the first half of the year, when folks are actually working on decking projects in time for the weather to make spring social outings and summer cookouts more logical. 

Growth should continue into 2016, even if it will be a decelerated pace. Trex's guidance calls for net sales of $131 million during the current quarter, a huge sequential pop but representing just 8% growth on a year-over-year basis. However, it did point out that it sees its average incremental margin widening during the period, suggesting another quarter of strong bottom-line growth. 

Trex's product lines are clearly in demand these days, and that's saying something in light of how some of the other publicly traded provider of flooring products have faltered this earnings season. Just as Trex's stock was soaring, Lumber Liquidators (LL -0.58%) saw its stock plunge 22% last week. 

The leading yet reeling retailer of discounted hardwood flooring took another hit last week after the Centers for Disease Control revealed that the cancer risk associated with Lumber Liquidators' Chinese-sourced laminates was higher than it had originally assessed. It had tested the formaldehyde levels in the product based on the wrong ceiling height, understating the risk of the known carcinogen. 

Lumber Liquidators can't seem to catch a break, and things didn't get any easier on Monday when it reported a much larger quarterly loss than Wall Street was expecting. It just can't convince shoppers to give it a shot at providing their homes with flooring solutions. Comparable-store net sales plunged 17.2%, fueled primarily by a 15.6% dip in customers invoiced -- but they also spent a little less this time around.

There was a time when most of the home-improvement stocks were market darlings. The real estate market was rebounding, and improving home values and affordable mortgages offered up the perfect climate for folks to update their digs. Trex shares drifted slightly lower last year, but Lumber Liquidators stock got crushed once the formaldehyde scandal broke. Investors can't just choose a sector or even a niche in an industry. There are winners and losers in every specialty, and when it comes to wood or wood-like plank flooring, we see Trex winning and Lumber Liquidators still losing.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Trex. The Motley Fool recommends Lumber Liquidators. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

LL Flooring Holdings, Inc. Stock Quote
LL Flooring Holdings, Inc.
$6.81 (-0.58%) $0.04
Trex Stock Quote
$45.89 (2.50%) $1.12

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